A Federal Court judge on Sept. 25 allowed a class-action lawsuit alleging home sellers in the Toronto area have been forced to pay artificially inflated commissions for years. The lawsuit alleges major brokers and real estate organizations in Toronto implemented rules that essentially stifled competition for buyer brokerage services, leading to higher prices. But what exactly is buyer brokerage and what is its role in the potentially landmark lawsuit? The Financial Post’s Shantaé Campbell explains.
The current housing market has defied expectations of a downturn in real estate prices caused by this year’s surging mortgage rates. Instead, prices and demand have remained strong, confounding experts and stymying many first-time homebuyers.
The reason? “Blame the boomers,” according to one Wall Street economist.
It may seem paradoxical, acknowledged Barclays senior economist Jonathan Millar in a Thursday research report. After all, many would assume that an aging population would require fewer homes, but that’s actually not the case, he noted.
Baby boomers are actually creating more households, putting pressure on housing demand and keeping prices aloft despite the highest mortgage rates in. Boomers are creating more households partly because they’re separating due to divorce or death, Millar noted.
“[A] given person is generally more likely to become the head of a household as he or she ages, with the highest likelihood occurring beyond retirement age,” Millar wrote. “Hence, as an increasing share of the population shifts into older age groups, more and more households tend to be formed.”
While boomers will eventually require fewer homes as they get even older, that might not happen for quite some time, he added. The youngest boomers are 59 years old, which means there are millions of boomers still in the workforce who will be retiring over the next several years, adding to more household creation.
“Despite notable increases in [housing] demand from the 35-44 cohort, almost all of additional demand is explained by the aging population — with significant increases in households in the 65-74 and 75+ groups,” Millar noted.
To be sure, other experts have pointed to other issues impacting the real estate market, including a lack of inventory. Because of this year’s surge in mortgage rates, fewer homeowners are listing their properties, fearing that they would have to buy a new home at a rate of 7% or higher — more than double the typical rate during the pandemic. Slim inventory means that buyers are competing for a limited pool of housing, driving prices upward.
What is “household formation”?
The formation of households is one of the engines that drives the housing market. It occurs when a person who has been living in a home with other people moves out on their own, becoming the head of a new household.
That often happens when young adults move out of their parents’ home or into their first apartments after college, and the data shows that there’s a jump in household formation at age 25. But the trend then gradually rises until it peaks around retirement age and older, Millar noted.
“Among other things, this reflects the parenthood phase during prime age (25-54), the separation of adult children from the household, divorce and the heightened possibility of eventually losing a life partner to death,” he wrote.
Will housing prices come down?
At the same time, there’s not enough available housing in the U.S. to supply the demand from people looking to move into their own homes, he noted. That’s creating pressure on prices and partly explains this year’s gravity-defying prices.
The median sales price for existing homes rose 1.9% in July to $406,700 compared with a year earlier, although prices dipped slightly in the beginning of the year, according to data from the National Association of Realtors. That’s an increase of 57% since January 2020, prior to the pandemic, when the median sales price for existing homes was $266,300.
Millar predicts that demand for housing is likely to continue given the demographics of aging boomers. And while new housing construction could help provide more supply, and could help blunt the rise in prices, real estate could still inch upward in price, he noted.
Prices are likely to “decelerate slowly,” reaching increases of about 2.5%, he added. But if the Fed cuts rates in 2024, that could spark more buying, because cheaper financing could spur more people to jump into the market.
“With overall housing shortages likely to prevail, we think risks to our forecasts for both housing prices and rents are to the upside, especially as the Fed enters its cutting cycle in late 2024,” Millar concluded.
Of course, not everyone agrees with Millar’s rationale, with Capital Economics forecasting that housing demand may be weak in the next few months.
“With affordability stretched and the economy slowing, housing-market activity is expected to remain weak over the coming quarters,” Imogen Pattison, assistant economist with Capital Economics, said in a new report. “While we expect house prices to lose some of their recent momentum, the worst of the correction appears to have passed and we don’t expect further sustained declines.”
Hong Kong shares drop 3%, dragged down by real estate and energy
Hong Kong’s Hang Seng Index dropped more than 3% Tuesday, dragged by its real estate and energy sectors.
The benchmark index’s loss of over 500 points is a significant decline, Everbright Securities’ Kenny Ng told CNBC via e-mail.
“On one hand, this was driven by profit-taking following a 400-point rise last Friday,” the securities strategist explained. “Additionally, the US dollar index has remained relatively strong, exerting downward pressure on the Hong Kong stock market.”
The index was last trading down 3.16% after coming back from a holiday on Monday.
Ng highlighted how property stocks were among the largest decliners Tuesday, given the high-interest environment.
Hong Kong listed property stocks were firmly in the red. Country Garden Holdings plunged 7.67%, leading losses in the sector, while Longfor Group Holdings lost 4.82%. New World Development shed 6.69%, and Henderson Land Development traded 6.15% lower.
“Coupled with the relatively sluggish mainland Chinese real estate market, it is expected that this sector will continue to face downward pressure in the short term,” Ng added.
China’s property market has struggled with faltering consumer confidence, as property giants Evergrande and Country Garden were mired in debt problems.
Separately, beleaguered Chinese property giant Evergrande resumed trading in Hong Kong. Shares have been volatile since resuming trade in late August following a 17-month suspension. The stock rose 22% in early trade. The firm’s EV unit also halted trading Tuesday.
Toronto real estate class-action could affect billions of dollars in commissions
What does ‘buyer brokerage’ mean?
This transformation prompted the creation of specific legislations and regulations by provincial governments and real estate regulatory bodies in Canada, such as the Real Estate Council of Ontario (RECO), the Canadian Real Estate Association (CREA) and the Toronto Regional Real Estate Board (TRREB).
These rules and protocols serve to formalize and oversee buyer brokerage relationships by instituting a framework governing duties, responsibilities, disclosure, consent and confidentiality.
Where do commissions come in?
Nationwide, commission structures for real estate agents and brokerages typically involve a percentage-based commission derived from a home’s sale price, but the rates vary.
For example, if a home sells for $1 million with a commission of five per cent, the total commission amounts to $50,000. This sum, paid by the seller, is generally shared equally between the seller’s and buyer’s agents, each receiving $25,000. However, the precise division can fluctuate, being contingent on the agreement established between the seller and their agent.
Why are commissions split this way?
According to CREA, the organization does not mandate a specific commission split or dictate how commission should be allocated between the listing and buyers’ realtors.
Rule 126.96.36.199 in CREA’s by-laws and rules states: “The listing realtor member agrees to pay to the co-operating (i.e. buyer’s) realtor member compensation for the cooperative selling of the property. An offer of compensation of zero is not acceptable.”
In an email, RECO said commission rates are not fixed. “Commission rates are not set or approved by the Real Estate Council of Ontario, government authorities, real estate associations or real estate boards,” it said.
The splitting of commission between the buyer’s and seller’s agents is nonetheless a well-established practice in real estate designed to promote cooperation, balance and fairness within the industry. The idea is that a shared commission incentivizes buyer agents to introduce more potential buyers to the home, leading to a faster and possibly more profitable sale.
Furthermore, the commission model serves to reduce potential conflicts of interest by eliminating the buyer’s direct financial obligation to their agent, preventing undue pressure on buyers and ensuring accessibility to agent services.
Why is this a problem?
The lawsuit lodged by plaintiff Mark Sunderland against defendants TRREB, CREA and various real estate brokerages contends that an arrangement known as the ‘buyer brokerage commission rule’ has been in effect since at least March 2010.
Sunderland’s lawsuit posits that this arrangement has impeded market competition, compelling sellers to incur costs they would not otherwise bear in the absence of such an agreement. Furthermore, it contends that this setup precludes the negotiation of price and quality of the service.
Barwick says that even without formal policies mandating uniform rates, brokers, reliant on peer co-operation to draw buyers to properties, can help uphold a standard commission rate locally, especially for buyers’ brokers.
Michael G. Osborne, an attorney who specializes in antitrust and competition law at Cozen O’Connor in Toronto, says that from a competition point of view, there is a potential issue pertaining to the mechanism wherein brokerages must become members of CREA and TRREB to operate. Essentially, though Broker A and Broker B have no direct written agreement between them, by aligning with an association’s rules they can be seen by the Competition Bureau to be operating under an indirect “hub and spoke” agreement.
How much is at stake in the lawsuit?
Kalloghlian Myers LLP is seeking compensation for anyone who has sold a home since 2010, though they have not yet put an overall dollar value on what they are seeking.
If every transaction covered by TRREB is affected, the sums involved could be substantial.
According to annual sales and average price figures on TRREB’s website, more than $880 billion in residential real estate changed hands between 2010 and 2022. Five per cent commission on those sales would amount to $44 billion, with as much as half going to buyer brokerages.
Can home sellers participate in the lawsuit?
In a class-action lawsuit, individuals who are similarly affected are generally automatically included, meaning there’s usually no need to actively “get in on” the lawsuit. If the ruling is in favour of the class, affected individuals will be notified about their entitlements. The duration of such lawsuits can vary widely, depending on the complexities involved and the legal pathways taken.
Should compensation be awarded, the distribution could take several years.
Katy Perry real estate battle inspires a bill to protect elders from financial abuse
While Katy Perry prepares to take the stand in court, a bill with her name might be going to DC.
The “Fireworks” songstress and her partner Orlando Bloom are currently tied up in a legal battle with 84-year-old Carl Westcott, the founder of 1-800-Flowers, who claims he was on painkillers when he agreed to sell the couple his Santa Barbara mansion. Perry and Bloom are not named in Westcott’s filing, which is against the couple’s business manager, Bernie Gudvi.
As the trial rages on, members of the Wescott family are throwing their support behind a newly launched campaign for the Protecting Elder Realty for Retirement Years (PERRY) Act. “The Katy PERRY Act addresses the risks of elder financial abuse, especially as it relates to property and real estate sales and transfers,” a website for the act explains.
Representatives for Perry did not immediately respond to EW’s request for comment.
Jason Kempin/Getty Images Katy Perry
In an op-ed for The Federalist, Carl Wescott’s son, Chart Wescott, called upon California and other state legislators to pass the act, which establishes a 72-hour grace period during real estate sales and transfers of personal residences that allows either party to rescind the agreement without penalty, if one party is over the age of 75.
The website also lists the 38 state and local politicians who are backing the act.
Per PEOPLE, Perry and Bloom originally purchased the 9,285-square-foot home from Wescott in July 2020 for $15 million. Days after the deal was finalized, Wescott claimed that he had been recovering from spinal surgery at the time of the agreement.
During opening statements last Wednesday, Westcott’s attorney Andrew Thomas said that his client, who was diagnosed with the genetic brain disorder Huntington’s Disease in 2015, had been showing signs of “delusion” and “intrusive thoughts” after taking the painkillers and was still recovering from “post-operative delirium.”
In a countersuit, Perry is seeking more than $5 million in damages due to loss of potential rental income and for the cost of maintaining other properties that she and Bloom rent. She is expected to remotely testify this week in the non-jury trial which began last Wednesday.
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